“Just short,” he told me. “Short what?” I asked. His answer was even simpler: “Everything.”

That’s the advice I got last Friday from a stock speculator who didn’t know what I do for a living - he never asked, because who needs more information or opinions when it gets this clear? He probably just assumed I was a tired old stiff who would have trouble even finishing his laps in the pool. That, at least, may have been right.

As it turns out, it’s not that easy. Not for the longs, as we know all too well, but not for the shorts, either. So, who’s got the most risk now?

Consider the fact that the S&P 500 is now down about 20% in October. But in that historical span of declines, there were 2 trading days where the S&P was up a combined 22%.

Stocks like Dineequity (DIN), which offered a very tempting recipe of data for plenty of shorts, was up 102% yesterday. My strong hunch is that there will be more blow-ups like this, and I will likely own none of them. Earlier this month, however, I decided also not to be short with individual stock risk for a little while either. Un-covered shorts can lose more than they think they have at risk, like that one-day pancaking in DIN, whereas un-levered longs can't lose 102% in a day. So, who’s got the most risk here?

I don't think it gets easier for the longs either - not even at these levels. One of their favorite arguments is that cash-heavy long-only managers will be just as scared to underperform in a rally as they were to lose money in a decline (maybe even more). What a wicked fact then that the 3 best performing stocks in a historic rally like yesterday in the “large” cap S&P 500 began the day under $5 a share and, therefore, out of reach of what many managers can even purchase by their own good rules.

Shorts and longs can get blown up in the same market. And what better way to summarize the week than a World Series game with secretly changed rules that was suspended before it was over, frustrating both sides. Yet the game was still scored as a win for one team and a loss for the other in Las Vegas because they stuck to the rules? Honor Roll: Gangsters 1, Regulators 0.


Colagero: Is it better to be loved or feared?

Sonny: That’s a good question. It’s nice to be both, but it’s difficult. But if I had my choice I would rather be feared. Fear lasts longer than love. Friendships bought with money mean nothing.
-A Bronx Tale

Ladies and gentlemen, your 2008 Stock Market.

Meanwhile, my work continues to be focused on the two sides of 4% that I've written about, and my positions continue to grow around each. Rather than get caught up in shorter term fear of crashes or rallies, I'm trying to look around the corner and ask what will look most silly a few years from now.